Insurance for corporate transactions, known as representation and warranty coverage (R&W), is becoming increasingly common among buyers and sellers engaged in global mergers and acquisitions. According to Marsh, demand for R&W jumped 35% over the past 12 months, even as M&A fell off. “Demand for transactional risk insurance has soared as both buyers and sellers worry about how to protect their positions during a deal,” says Lorraine Lloyd-Thomas, senior vice president in the private equity and M&A practice at Marsh.
Some of the increased demand, Lloyd-Thomas says, comes from U.S. buyers and sellers using R&W coverage to counter risks associated with investing in Europe and Asia. U.S. buyers account for 36% of R&W insurance purchased over the past year, with European firms accounting for another 52%.
Craig Schioppo, managing director for Marsh USA’s financial and professional group, says one change over the past year is that large corporations, including Fortune 100 companies, are routinely obtaining coverage for deals in the $50 million to $1.5 billion range. “For deals bigger than $2 billion, we don’t see the insurance coverage being purchased,” he says.
Typically, a buyer contracts for insurance that covers up to 10% of the price of a deal and protects the buyer from risks that may not have been adequately disclosed or anticipated by the seller, such as a potential lawsuit.
Even as demand for coverage has grown, rates have held steady. “Over the past seven to eight years, rates fell by half,” Schioppo says. “But now the increased demand is not pushing rates up.” While premiums five years ago came to about 5% to 6% of the coverage amount, they have fallen to about 2% to 3%. One reason, Schioppo suggests, is that more insurers are offering the policies, increasing competition. Seven major companies now offer transactional insurance, including Hartford, Chartis and Concord Specialty Risk.
Markus Bolsinger, a partner at the New York-based law firm Kirkland & Ellis, argues R&W coverage is likely to become routine in M&A deals.
“In the past,” Bolsinger says, “you had an advantage in the auction process if you came in with a bid that included transactional insurance. Now you’re at a disadvantage if you don’t utilize it. That shift is the reason you’re seeing the big increase in demand.”
Bolsinger says about 20% of M&A deals result in some kind of claim against the seller, and between a quarter and half of those claims result in some recovery.